Unit 1: Cost accounting fundamentals & the cost sheet
Cost Accounting notes · PTU syllabus (BCOM 201-18)
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Unit summary
Financial accounts show the profit of the whole business; cost accounts show what each product, job or process costs. This unit covers the meaning, objectives, nature and scope of cost accounting, its comparison with financial and management accounting, classification of costs, cost units and cost centres, the cost sheet, and tenders and quotations.
After this unit you can
- Define cost accounting and explain its objectives, nature and scope
- Compare cost, financial and management accounting
- Classify costs and identify cost units and cost centres
- Prepare a cost sheet and a tender or quotation
PTU syllabus topics
- Meaning
- objectives
- nature and scope of cost accounting
- comparison with financial and management accounting
- cost classification
- cost unit and cost centre
- preparation of cost sheet
- tenders and quotations
- Cost of sales
Cost of production + selling and distribution overheads
- Cost of production
Works cost + office overheads
- Works (factory) cost
Prime cost + factory overheads
- Prime cost
Direct material + direct labour + direct expenses
Topic 1
Meaning, objectives and scope of cost accounting
Costing is the technique and process of ascertaining costs. Cost accounting is the process of accounting for costs from the point at which expenditure is incurred to the establishment of its ultimate relationship with cost centres and cost units (CIMA).
Objectives
- Ascertainment of cost per unit, job, process or department.
- Cost control and cost reduction.
- Fixing selling prices and preparing tenders.
- Providing information for managerial decisions (make or buy, shut down, accept an order).
- Identifying wastage, losses and inefficiencies.
- Valuation of inventory (WIP and finished goods).
Nature and scope
- A branch of accounting, both a science (systematic body of knowledge) and an art (applied with skill), and a profession (ICMAI — Institute of Cost Accountants of India).
- Scope: cost ascertainment, cost accounting (recording), cost control, cost reports, cost audit (Section 148, Companies Act, 2013).
Exam tip
Advantages to mention: identifies profitable and unprofitable products, helps price fixing, controls wastage, aids budgeting and gives data for wage negotiations.
Topic 2
Cost, financial and management accounting compared
Objective
Ascertain and control costs
Find overall profit and financial position
Users
Internal management
External parties and management
Statutory requirement
Not compulsory for all (cost records for specified industries)
Compulsory
Period
Reports as frequently as needed
Usually annual
Analysis
By product, job, process, department
For the business as a whole
Data
Actual and estimated (standard) figures
Historical, actual figures
| Basis | Cost accounting | Management accounting |
|---|---|---|
| Scope | Narrow — deals with cost data | Wide — uses cost, financial and other data |
| Focus | Cost ascertainment and control | Planning, decision-making, control |
| Techniques | Costing methods, standard costing | Ratio analysis, budgeting, fund flow, cost data |
| Base | Base for management accounting | Built on cost and financial accounting |
Topic 3
Classification of costs
By element
Material, labour, expenses
By nature/traceability
Direct (traceable to a unit) vs indirect (overheads)
By function
Production, administration, selling, distribution, R&D
By behaviour
Fixed, variable, semi-variable
By controllability
Controllable vs uncontrollable
By time
Historical vs predetermined (standard)
For decision-making
Marginal, differential, opportunity, sunk, imputed
- Elements of cost: direct material, direct labour, direct expenses (together prime cost) and overheads (indirect material, labour and expenses).
- Cost unit: a unit of product or service in relation to which costs are ascertained — per tonne (steel), per kWh (electricity), per passenger-km (transport), per bed-day (hospital), per 1,000 bricks.
- Cost centre: a location, person or item of equipment for which costs are ascertained — production cost centres (machining shop) and service cost centres (stores, maintenance); personal and impersonal.
- Profit centre: a segment responsible for both revenue and costs.
Topic 4
The cost sheet
A cost sheet is a statement showing the various components of total cost of a product for a period, with cost per unit.
- 1
Direct material + direct labour + direct expenses = Prime cost
- 2
+ Factory overheads (± WIP adjustment) = Works (factory) cost
- 3
+ Office and administration overheads = Cost of production
- 4
+ Opening stock of finished goods − Closing stock = Cost of goods sold
- 5
+ Selling and distribution overheads = Cost of sales (total cost)
- 6
+ Profit = Sales
Example
Material ₹50,000, labour ₹30,000, direct expenses ₹5,000, factory overheads ₹15,000, office overheads ₹10,000, selling overheads ₹8,000; 1,000 units produced and sold at ₹150. Prime cost = ₹85,000; works cost = ₹1,00,000; cost of production = ₹1,10,000; cost of sales = ₹1,18,000; profit = 1,50,000 − 1,18,000 = ₹32,000; cost per unit = ₹118.
Items excluded from cost accounts
Purely financial items — interest received, dividends, profit or loss on sale of fixed assets, income tax, donations, goodwill written off, preliminary expenses written off, transfer to reserves.
Topic 5
Tenders and quotations
A tender (quotation) is an estimated price at which a firm offers to supply goods or execute an order. It is based on past cost data, adjusted for expected changes.
- 1Estimate material, labour and expenses for the order
- 2Apply overhead rates from past cost sheet
Factory overhead as % of wages, office overhead as % of works cost
- 3Add selling overheads
- 4Add desired profit
As % on cost or on sales price
Example
Last year: wages ₹40,000, factory overheads ₹20,000 (50% of wages); works cost ₹1,20,000; office overheads ₹12,000 (10% of works cost). New order: material ₹10,000, wages ₹8,000. Works cost = 10,000 + 8,000 + 4,000 = ₹22,000; cost of production = 22,000 + 2,200 = ₹24,200. For 20% profit on sales: price = 24,200 ÷ 0.8 = ₹30,250.
Exam tip
Profit as 20% on sales equals 25% on cost — convert carefully; it is a favourite exam trap.
Key terms
- Cost accounting
- Accounting for costs from incurrence to cost centres and cost units
- Prime cost
- Total of direct material, direct labour and direct expenses
- Cost unit
- Unit of product or service for which costs are measured
- Cost centre
- Location, person or equipment for which costs are ascertained
- Quotation
- Estimated price offered for supplying goods or executing an order
Quick revision
- Objectives: ascertainment, control, pricing, decision-making.
- Cost vs financial vs management accounting.
- Elements: material, labour, expenses; prime cost + overheads.
- Cost sheet: prime → works → production → cost of sales → sales.
- Quotation: past overhead rates + desired profit.
Important exam questions
Practice questions written to the PTU exam pattern for this unit's syllabus: short answers (Section A style) and long answers (Sections B and C style).
Short-answer questions
- Q1.Define cost accounting.
- Q2.State any four objectives of cost accounting.
- Q3.What is a cost unit? Give examples.
- Q4.What is a cost centre?
- Q5.What is prime cost?
- Q6.Name four items excluded from cost accounts.
Long-answer questions
- Q1.Explain the objectives, nature, scope and advantages of cost accounting.
- Q2.Distinguish cost accounting from financial and management accounting.
- Q3.Explain the classification of costs.
- Q4.Prepare a cost sheet and explain how a tender price is determined.
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